City of Cagayan de Oro vs. Cagayan Electric Power & Light Co., Inc.

An ordinance imposing a Mayor's Permit Fee on utility poles is a valid exercise of police power as a regulatory fee, not a tax, and thus need not be appealed to the Secretary of Justice under Section 187 of the Local Government Code; moreover, such an ordinance enjoys a presumption of validity that can only be overcome by clear evidence demonstrating that the fee is unjust, excessive, oppressive, or confiscatory, which burden the assailant failed to discharge.

The City of Cagayan de Oro, through its Sangguniang Panlungsod, enacted Ordinance No. 9527-2005 to regulate the proliferation of electric and telecommunication poles within the city. The ordinance cited concerns over traffic hazards, public safety, and aesthetic nuisance posed by poorly maintained poles. It imposed an annual fee of P500.00 per post on public utility companies, with the City Engineer tasked to conduct regular inventories. CEPALCO, a power distribution utility with approximately 17,000 poles in the city, stood to incur an annual liability of P8,500,000.00 under the new regulation.

• The Regulatory Measure: On January 24, 2005, the City of Cagayan de Oro enacted Ordinance No. 9527-2005, entitled "An Ordinance Imposing a Mayor's Permit Fee on Electric and/or Telecommunication Poles/Posts..." The ordinance cited the hazards and nuisances posed by poorly maintained poles and the City's authority under the Local Government Code to impose regulatory fees. It levied an annual fee of P500.00 per post on poles owned by public utility companies erected along government streets, roads, highways, and alleys, exempting those owned by the national government or other LGUs.
• CEPALCO's Opposition: CEPALCO, a public utility engaged in electric power distribution and owner of approximately 17,000 utility poles in the city, faced an annual fee of P8,500,000.00. On September 30, 2005, CEPALCO filed a petition before the Cagayan RTC seeking declaratory relief, arguing the ordinance was unlawful as it was unjust, excessive, oppressive, and confiscatory, and allegedly violated its legislative franchise exempting it from local taxes and fees.
• City's Defense: The City countered that the ordinance was a valid exercise of police power under the Constitution and the Local Government Code. It argued that Section 9 of CEPALCO's franchise actually subjected the company to taxes, duties, fees, or charges.
• Trial Court Proceedings: The Cagayan RTC initially issued a writ of preliminary injunction on May 5, 2006. However, in its Resolution dated February 8, 2008, the RTC dismissed the petition, ruling that CEPALCO failed to exhaust administrative remedies by not appealing the ordinance to the Secretary of Justice under Section 187 of the Local Government Code. The trial court noted that while it found the tax excessive, the issue was best left to the city council's discretion.
• Appellate Court Ruling: The CA reversed the RTC on June 10, 2015. It declared the ordinance void, holding that the P500.00 fee was exorbitant and unreasonable because the City failed to explain the basis for the amount or how it related to the cost of regulation and inspection.

• Exhaustion of Administrative Remedies: The City maintained that CEPALCO should have challenged the ordinance before the Secretary of Justice under Section 187 of the Local Government Code because the imposition was a tax or revenue measure, not merely a regulatory fee. The City argued that the case should have been dismissed for non-exhaustion.
• Presumption of Validity: The City argued that the CA erred in reversing the presumption of validity. It posited that CEPALCO bore the burden of proving the fee was unreasonable, and since CEPALCO presented no evidence on the propriety of the amount, the ordinance must be upheld. The City contended that local governments have wide discretion in determining fee rates, and courts should not interfere absent proof of unreasonableness.

• Nature of the Imposition: CEPALCO countered that the ordinance imposed a regulatory fee, not a tax, and therefore the doctrine of exhaustion of administrative remedies under Section 187 (which applies only to tax ordinances or revenue measures) was inapplicable.
• Excessiveness and Confiscatory Nature: CEPALCO argued that the CA correctly declared the ordinance void because the P500.00 per post fee was unjust, excessive, oppressive, and confiscatory. It emphasized that the annual payment of P8,500,000.00 was "shocking to the conscience" and substantially exceeded the costs of regulation and inspection, violating Sections 130, 147, and 186 of the Local Government Code.

• Exhaustion of Administrative Remedies: Whether CEPALCO was required to exhaust administrative remedies by appealing Ordinance No. 9527-2005 to the Secretary of Justice prior to filing the action for declaratory relief.
• Substantive Validity of the Fee: Whether the amount of the Mayor's Permit Fee (P500.00 per post per year) is excessive, unreasonable, and exorbitant, rendering the ordinance void.

• Exhaustion of Administrative Remedies: Administrative appeal to the Secretary of Justice was not required. The ordinance imposed a regulatory fee, not a tax. Section 187 of the Local Government Code applies only to "tax ordinances or revenue measures." The word "or" in that phrase is interpretative, meaning "that is to say," rendering "revenue measures" synonymous with "tax ordinances." Since the ordinance's whereas clauses expressly stated its purpose was to regulate the construction and maintenance of poles (police power) and not to raise revenue, it was properly classified as a regulatory fee. Direct recourse to the courts is permissible for challenges to regulatory fees without prior administrative appeal.
• Substantive Validity of the Fee: The ordinance is valid and constitutional. Ordinances enjoy a presumption of validity, placing the burden on the assailant to prove invalidity by clear and unequivocal evidence. The alleged unreasonableness was not apparent on the face of the ordinance. CEPALCO failed to discharge its burden of proving that the P500.00 fee was disproportionate to the actual cost of regulation, inspection, and licensing as required by Section 147 of the Local Government Code. Bare allegations and self-serving statements without concrete evidence comparing the fee to regulatory costs are insufficient to overcome the presumption. The CA erred in shifting the burden to the City to justify the fee's basis.

• Determination of Tax vs. Fee — The primary purpose of an imposition determines its classification. If the purpose is primarily revenue, or if revenue is at least one of the real and substantial purposes, the exaction is a tax. If the purpose is primarily to regulate, it is a regulatory fee (exercise of police power), even if revenue is incidentally generated. The whereas clauses of an ordinance are determinative of legislative intent regarding its purpose.
• Exhaustion of Administrative Remedies under Section 187 of the LGC — The requirement to appeal to the Secretary of Justice within 30 days applies strictly to tax ordinances or revenue measures. It does not apply to regulatory fees. The phrase "tax ordinances or revenue measures" uses "or" in an interpretative sense, equating the two terms, as both refer to measures primarily designed to raise revenue.
• Presumption of Validity of Ordinances — Ordinances, like laws, enjoy a strong presumption of constitutionality and validity. This presumption places a heavy burden on the party assailing the ordinance to prove invalidity beyond reasonable doubt by clear and convincing evidence. Courts must exercise the highest degree of circumspection before striking down an ordinance and should refrain from interfering with legislative acts absent a clear showing of unconstitutionality or unreasonableness.
• Test for Validity of Regulatory Fees — Regulatory fees must be commensurate with the cost of regulation, inspection, and licensing (Section 147, LGC). A fee is considered excessive and invalid if it produces revenue substantially in excess of the cost of regulation. The burden of proving such excessiveness lies with the party challenging the ordinance.

• "Ordinances, like laws, enjoy a presumption of validity. However, this presumption may be rendered naught by a clear demonstration that the ordinance is irreconcilable with a constitutional or legal provision, that it runs afoul of morality or settled public policy, that it prohibits trade, or that it is oppressive, discriminatory, or unreasonable." — Articulates the standard for judicial review of ordinances.
• "The purpose of an imposition will determine its nature as either a tax or a fee. If the purpose is primarily revenue, or if revenue is at least one of the real and substantial purposes, then the exaction is properly classified as an exercise of the power to tax. On the other hand, if the purpose is primarily to regulate, then it is deemed an exercise of police power in the form of a fee, even though revenue is incidentally generated." — Establishes the test for distinguishing taxes from fees.
• "The word 'or'... was intentionally used by the legislature to particularize that [an antecedent phrase is the equivalent of a subsequent phrase]... It is not always disjunctive and is sometimes interpretative or expository of the preceding word." — Explains the interpretation of Section 187 LGC.
• "Courts will go slow in writing off an ordinance as unreasonable unless the amount is so excessive as to be prohibitive, arbitrary, unreasonable, oppressive, or confiscatory." — Emphasizes judicial restraint in reviewing legislative determinations of fee amounts.

• Smart Communications, Inc. v. Municipality of Malvar, 727 Phil. 430 (2014) — Followed for the principle that the whereas clauses of an ordinance reveal its primary purpose, determining whether it is a regulatory fee or a tax.
• Gonzales v. GJH Land, Inc., 772 Phil. 483 (2015) and San Miguel Corp. v. Municipal Council — Cited for the interpretative construction of the word "or" in statutory language.
• Morcoin Co., Ltd. v. City of Manila, 110 Phil. 921 (1961) — Distinguished; held that an ordinance was invalid only after the plaintiff presented evidence showing the fee exceeded the income generated by the regulated activity. The present case lacked such evidentiary proof.
• Balacuit v. Court of First Instance, 246 Phil. 189 (1988) and City of Manila v. Hon. Laguio, Jr., 495 Phil. 289 (2005) — Cited for examples of facially invalid ordinances where evidence was unnecessary, contrasting with the present case where evidence was required to prove excessiveness.
• Victorias Milling Co., Inc. v. Municipality of Victorias, 134 Phil. 180 (1968) — Reiterated for the principle that courts should respect the discretion of municipal authorities and go slow in writing off an ordinance as unreasonable.

• Article X, Section 5, 1987 Constitution — Basis for the power of local government units to create their own sources of revenue and levy taxes, fees, and charges.
• Section 131 (Definition of Terms), Section 147 (Fees and Charges), Section 186 (Power To Levy Other Taxes, Fees or Charges), and Section 187 (Procedure for Approval and Effectivity of Tax Ordinances and Revenue Measures), Republic Act No. 7160 (Local Government Code) — Section 131 defines "fee" as a charge for regulation or inspection; Section 147 mandates that fees be commensurate with the cost of regulation; Section 186 prohibits fees from being unjust, excessive, oppressive, or confiscatory; Section 187 establishes the administrative appeal procedure for tax ordinances or revenue measures.

Antonio T. Carpio (Chairperson), Estela M. Perlas-Bernabe, Alfredo Benjamin S. Caguioa, and Alex L. Reyes, Jr.